No Access

THE IMPACT OF COMMODITY TRANSACTION TAX ON FUTURES TRADING IN INDIA: AN EX-ANTE ANALYSIS

PRAVAKAR SAHOO

Institute of Economic Growth (IEG), Delhi University, New Delhi, India

Corresponding author.

Search for more papers by this author

and

RAJIV KUMAR

Indian Council for Research on International Economic Relations (ICRIER), India Habitat Centre, New Delhi, India

Search for more papers by this author

https://doi.org/10.1142/S0217590811004328Cited by:4 (Source: Crossref)

Abstract

Trading in commodity derivatives on exchange platforms is an instrument to achieve price discovery and better price-risk management besides helping the macroeconomy with better resource allocation. In the 2008–2009 budget, the Indian government proposed to impose a commodity transaction tax (CTT) amounting to 0.017% of trading value. In this context, we examine the relationship between trading activity, volatility and transaction cost for five most traded commodities in India. Results suggest that there exists a negative relationship between transaction cost and liquidity and a positive relationship between transaction cost and volatility. Further, the results of structural model support the results of VAR analysis. Therefore, if the government imposes CTT, it would lead to higher volatility and lower trading activity affecting market efficiency and liquidity.

Keywords:

JEL: G19, G13, G14

References

A. R. Admati and P. Pfleiderer, The Review of Financial Studies 1(1), 3 (1988), DOI: 10.1093/rfs/1.1.3. Crossref, Web of Science, Google Scholar
Aitken, M and A, Frino (1993). The determinants of market bid ask spreads on the Australian Stock Exchange: Cross-sectional analysis. SIRCA Working Papers 1993, pp. 2–23 . Google Scholar
Aitken, M, M Duffy and A Frino (1994). Trading activity, volatility and transaction costs for the Sydney Futures Exchange SPI future: The impact of specification changes. www.sirca.org.au/Papers/1994012.pdf . Google Scholar
R. Z. Aliber, B. Chowdhry and S. Yan, European Finance Review 7, 481 (2003), DOI: 10.1023/B:EUFI.0000022143.77321.20. Crossref, Google Scholar
Y. Amihud and H. Mendelson , Modernizing US Securities Regulation: Economic and Legal Perspectives , eds. K. Lehn and R. Kamphius ( Irwin , Homewood, Illinois , 1993 ) . Google Scholar
Baker, D (2009). Financial transactions taxes: Easy and fun money. The Guardian Unlimited. December 14, 2009. http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/ftt-easy-fun-money/ . Google Scholar
Baker, D (2009). Financial transactions taxes must come before a national sales tax. The Guardian Unlimited. November 9, 2009. http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/ftt-before-vat/ . Google Scholar
B. H. Baltagi, D. Li and Q. Li, Empirical Economics 31(2), 393 (2006), DOI: 10.1007/s00181-005-0022-9. Crossref, Web of Science, Google Scholar
H. Bessembinder and P. L. Seguin, Journal of Financial and Quantitative Analysis 28, 21 (1993), DOI: 10.2307/2331149. Crossref, Web of Science, Google Scholar
R. K. Chou and J. H. Lee, Journal of Futures Market 22, 173 (2002), DOI: 10.1002/fut.2213. Crossref, Web of Science, Google Scholar
R. K. Chou and H. K. Wang George, Journal of Futures Markets 26(12), 1195 (2006), DOI: 10.1002/fut.20238. Crossref, Web of Science, Google Scholar
R. K. Chou and Y.-Y. Wang, Journal of Future Markets 29(12), 1102 (2009), DOI: 10.1002/fut.20416. Crossref, Web of Science, Google Scholar
G. M. Constantinides, Journal of Financial Economics (1986). Google Scholar
Desai, M (2008). Financial Times (June 6, 2008) . Google Scholar
F. R. Edwards, Journal of Financial Services Research 7, 75 (1993), DOI: 10.1007/BF01048341. Crossref, Google Scholar
Ericsson, J and R Lindgren (1992). Transaction taxes and trading volume on stock exchanges: An international comparison. Stockholm School of Economics, Working Paper, No. 39 . Google Scholar
C. J. Gilbert, Economic Journal 95, 637 (1985), DOI: 10.2307/2233031. Crossref, Web of Science, Google Scholar
Government of India (2008). Report of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices, Chaired by Abhijit Sen, Ministry of Consumer Affairs . Google Scholar
J. A. Grundfest and J. B. Shoven, Journal of Accounting, Auditing and Finance 6, 409 (1991). Crossref, Web of Science, Google Scholar
Habermeier, K and AA Kirilenko (2003). Securities transaction taxes and financial markets. IMF Staff Papers, 50, 165–180 . Google Scholar
W. G. Hsieh, Journal of Futures Markets 24(4), 399 (2004), DOI: 10.1002/fut.10122. Crossref, Web of Science, Google Scholar
S. Hu, Pacific-Basin Finance Journal 6(3), 347 (1998), DOI: 10.1016/S0927-538X(98)00017-1. Crossref, Google Scholar
IMF Survey Magazine (2010). In the news. IMF and Civil Society. IMF Launches Consultative Process on Financial Sector Tax. IMF Survey online. January 11, 2010. http://www.imf.org/external/pubs/ft/survey/so/2010/new011110a.htm . Google Scholar
Kiefer, DW (1990). The Securities Transaction Tax: An Overview of the Issues. Washington, DC: Library of Congress, Congressional Research Services . Google Scholar
P. H. Kupiec, Journal of Financial Services Research 3, 117 (1996). Web of Science, Google Scholar
A. W. Lo, H. Mamaysky and J. Wang, Journal of Political Economy 112, 1054 (2004), DOI: 10.1086/422565. Crossref, Web of Science, Google Scholar
L. Norden, Journal of Futures Markets 29, 775 (2009). Crossref, Web of Science, Google Scholar
Parker, G and B Tony (2009). EU leaders urge IMF to consider Tobin Tax. Financial Times (December 11, 2009). http://www.ft.com/cms/s/0/aa162054-e65e-11de-bcbe-00144feab49a.html . Google Scholar
Phillips, PCB, Y Wu and J Yu (2009). Explosive behavior in the 1990s Nasdeq: when did exuberance escalate asset values? Cowles Foundation Discussion Paper No. 1699, Yale University . Google Scholar
C. Pirrong, Journal of Futures Markets 16(5), 519 (1996). Crossref, Web of Science, Google Scholar
R. Roll, Journal of Financial Services Research 3(2–3), 211 (1989), DOI: 10.1007/BF00122803. Crossref, Web of Science, Google Scholar
P. Sahoo, Asian Economic Review 48(4), (2004). Google Scholar
Sahoo, P and R Kumar (2008). Impact of proposed commodity transaction tax on futures trading in India, Working paper No. 216, Indian Council for International Economic Relations, New Delhi, India . Google Scholar
P. Sahoo and R. Kumar, Global Business Review 10(2), 187 (2009), DOI: 10.1177/097215090901000204. Crossref, Google Scholar
Saporta, V and K Kan (1997). The effects of stamp duty on the level and volatility of UK equity prices, Bank of England Working Paper, No. 71 . Google Scholar
J. E. Stiglitz, Journal of Financial Services Research 3, 101 (1989), DOI: 10.1007/BF00122795. Crossref, Web of Science, Google Scholar
L. H. Summers and V. P. Summers, Journal of Financial Services Research 3, 275 (1989), DOI: 10.1007/BF00122806. Google Scholar
Swiss Finance: On deaf ears (August 28, 1993). The Economist, pp. 72 and 74 . Google Scholar
Turner (2009). Financial Times (September 10, 2009) . Google Scholar
S. R. Umlauf, Journal of Financial Economics 33, 227 (1993), DOI: 10.1016/0304-405X(93)90005-V. Crossref, Web of Science, Google Scholar
UNCTAD (2009). The Global Economic Crisis: Systemic Failures and Multilateral Remedies. Switzerland: UNCTAD . Google Scholar
UNCTAD (2009). Global Economic Crisis: Implications for Trade and Development. Report by Trade and Development Commission, Geneva . Google Scholar
Varangis, P and D Larson (1996). Dealing with commodity price uncertainty. Policy Research Working Paper 1167, World Bank, Washington D.C . Google Scholar
G. H. K. Wang and J. Yau, Journal of Futures Markets 20, 943 (2000). Crossref, Web of Science, Google Scholar
G. H. K. Wang, J. Yau and T. Baptiste, Journal of Futures Markets 17, 757 (1997). Crossref, Web of Science, Google Scholar
World Bank (1999). Using markets to deal with commodity price volatility. PREM Notes — Economic Policy, January (13) . Google Scholar